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Don't bank on Warren proposal for student loan forgiveness yet

Don't bank on Warren proposal for student loan forgiveness yet

May 6th, 2019 by Detroit Free Press in Business

Caution: If you're someone who grabs money management tips after a quick read of a headline or two on Twitter, take note. Don't bank on getting a big break yet on your college debt.

"College students who are graduating this year should not count on having their student loans forgiven," said Mark Kantrowitz, publisher and vice president of research for Savingforcollege.com.

"They should not put their loans into a deferment or forbearance in the hope that the student loans will soon be forgiven," he said. "All that will do is increase the amount they owe."

College debt has turned into a political football early during the 2020 presidential race. And we're going to hear a lot more on how to save young—and old—borrowers.

U.S. Sen. Elizabeth Warren, D-Massachusetts, has unveiled a plan that called for among other things:

- Canceling up to $50,000 in student loan debt for every person with a household income less than $100,000.

- Eliminating a lower amount of student loan debt for those with household incomes between $100,000 and $250,000. A person with household income of $130,000 would see $40,000 in college debt eliminated, according to Warren.

- Providing no debt cancellation to people with household incomes above $250,000.

- Making sure canceled student loan debt would not be taxed as income.

- Investing an additional $100 billion over the next 10 years in Pell Grants—and expanding who is eligible for a grant—to make sure that lower-income and middle-class students have a better chance of graduating without debt.

- Eliminating the cost of tuition and fees at every public two-year and four-year college in America.

Warren, who is vying for the Democratic presidential nomination, says her plan would wipe out student loan debt entirely for more than 75 percent of Americans with that debt.

And she says the plan would "provide targeted cancellation for families that need it most, substantially increase Black and Latinx wealth and help close the racial wealth gap," according to her essay posted on Medium.com, a blogging platform.

It's clear—or it should be—that $1.5 trillion in student loan debt can no longer be viewed as somebody else's problem. The size of the debt has more than tripled since 2005.

The interest keeps building and the level of debt very likely will put a lid on economic growth in the United States for years to come. It's hard to sell cars—or homes—to young consumers (or even their parents) when they are burdened by $50,000 or $80,000 in student loans.

In March, I reported that consumers younger than 35 aren't terribly optimistic about making big purchases, unlike previous generations, according to a survey conducted by the University of Michigan Institute for Social Research in Ann Arbor.

In the past decade, younger consumers have viewed buying conditions for homes, cars and other large household items far less favorably, the U-M survey noted.

"This is really a pervasive trend and it will not be reversed any time soon," Richard Curtin, director of the University of Michigan Survey of Consumers, told me then.

Financial tripwires add up for those who leave campus with too much college debt.

Libby Palackdharry, senior director of financial stability programs and operations for Southwest Economic Solutions, said many times clients face trouble with their credit scores because of the amount of student debt they owe and the amount of money they're making as new employees makes paying bills on time challenging.

"There are a lot of people who can't move forward," she said.

For example, Palackdharry said, it's difficult for younger consumers with college debt to save up money for a down payment for a home. Most of their income is going toward student loans and daily living.

Yet, the more you have for a down payment, the more affordable monthly mortgage payments will be on a home.

The college debt crisis could be viewed like the foreclosure crisis, she said, where extra steps and innovative strategies were necessary to help people get out from under all that debt.

A plan to cancel some college loan debt seems like a good strategy for many, she said.

"It would be phenomenal," Palackdharry said.

The student loan crisis is hitting African-American families particularly hard, said Wade J. Henderson, senior fellow at the Center for Responsible Lending in Washington, D.C.

He noted that African-American college graduates still earn substantially less than white counterparts holding many of the same jobs after college. As a result, they have less income to use toward repaying college debt.

In addition, he said, African-American families saw much of their wealth wiped out after the mortgage foreclosure crisis in 2008. Many were targeted with bad loan products, including subprime loans and balloon payments.

As a result, they had less equity in their homes after the crisis and could not provide much money to help their children avoid student loans when they headed to college.

Henderson called Warren's proposal "bold and creative."

But he said the proposal also is substantive in that it provides a source of revenue. Warren said the entire cost of her broad debt cancellation plan and universal free college would be more than covered by her "Ultra-Millionaire Tax." It's a new, proposed 2 percent tax on 75,000 families with $50 million or more in wealth.

What's important, Henderson said, is that Warren is recognizing that the U.S. economy would benefit by addressing the college debt load and making it more affordable for students to attend college.

Many people, including minorities and low-income white students, cannot find a job that gives them a foothold in the middle class with simply a high school diploma, he said.

"In today's world, a high school diploma guarantees virtually nothing from an employment standpoint," Henderson said.

A big blank check to cover most college debt still remains doubtful in many minds, given the size of the federal budget deficit and the great political divide.

"Republicans tend to oppose any kind of forgiveness," Kantrowitz said. "Republicans are more likely to support reducing interest rates and fees than forgiving loan principal."

And there is the forgiveness vs. fairness debate.

After all, we live in a world where plenty of people will argue: "I had to pay, so you should have to, too."

Even so, the conversation—including a multipronged approach that could include some level of debt forgiveness, lowering of rates, and strategies to reduce overall borrowing levels—is long overdue.

"With another borrower defaulting on a student loan every 28 seconds and 8 million borrowers already in default, the problem of student loans in America is reaching crisis levels," said Will Sealy, co-founder and CEO of Summer, a New York-based startup that offers software to help borrowers keep track of their student loans.

The consequences of a default are severe, such as seized wages and the federal government taking your tax refund to cover past-due student loans.

The Summer online platform guides borrowers through their repayment options, helping them enroll into the best savings plans digitally. College grads can sign up for free at www.meetsummer.org.

Overall, he said, borrowers often can avoid default if they are properly enrolled in federal repayment plans, including income-driven repayment plans and Public Service Loan Forgiveness, as well as nearly 120 state and career-based loan forgiveness programs.

Sealy, who previously worked with the Consumer Financial Protection Bureau on student debt issues, said college grads are often overwhelmed by their options. But they should still take time to review what they can do to make timely payments.

Kantrowitz said only 8 million of the 45 million borrowers are currently in an income-driven repayment plan. The average debt of these borrowers is $58,453.

"More than half of these borrowers probably have debt in excess of $50,000, and so won't have their student loans completely eliminated, even though they struggling to repay their student loans," Kantrowitz said.

When it comes to repaying college debt, Kantrowitz recommends:

- Choosing the repayment plan with the highest monthly payment you can afford. This will pay off the debt more quickly and save you the most money on interest.

— Sign up for auto-debit, where your monthly loan payments are automatically transferred to the lender. You not only will be less likely to miss a payment, but many lenders offer interest rate reductions as an incentive.

— Claim the student loan interest deduction on your federal income tax return. It lets you reduce your income by up to $2,500 in interest you paid on federal and private student loans.

— Target the loan with the highest interest rate for quicker repayment. There are no prepayment penalties on student loans. When making extra payments, be sure to include a cover letter that says that it is an extra payment and not an early payment of the next installment. Specify the ID number of the loan with the highest interest rate in the letter and on the check.

— Members of the U.S. Armed Forces on active duty are entitled to a reduction in the interest rate on their student loans and can defer repayment for the duration of their active duty service, plus 180 days.

It's also important that students seriously take into account how much money they're borrowing for college.

Before that May 1 college decision day, take another close look at how much money you're really being offered to attend a given school.

"Carefully distinguish between grants and loans on your financial aid award letter," Kantrowitz said.

"Grants are free money that does not need to be repaid. Loans have to be repaid, usually with interest. Some award letters blur the distinction between grants and loans, making loans look like grants. Ask questions if you are unsure if something is a grant or a loan."

Remember, if you agree to make interest-only or fixed payments, such as $25 a month, during the in-school period, some lenders will reduce your interest rate, saving you money in the long run.

Kantrowitz said it's important to aim to have total student loan debt at graduation that is less than your annual starting salary.

"If total debt is less than annual income, you should be able to repay your student loans in 10 years or less," he said.

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